Car Makers in India Begin Raising Prices

By Nikhil Gulati

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A General Motors Co. assembly line in India.

NEW DELHI—India’s auto makers on Friday began raising prices of cars and sport-utility vehicles to pass on an increase in the “factory gate” tax, a move that the industry expects will crimp demand for new vehicles in Asia’s third-largest automobile market.

The decision follows Finance Minister Pranab Mukherjee’s announcement to increase the base excise tax on most goods produced in India to 12% from 10%. The move is part of efforts aimed at “fiscal correction,” Mr. Mukherjee said in his budget speech to parliament.

Demand for new cars and SUVs has remained tepid this fiscal year, which runs through the end of the month, because of higher fuel costs, costly loans and high inflation. Local sales of cars and SUVs grew about 3% from April 2011 to February this year, slowing sharply from the year-earlier pace of 30%.

“Interest rates continue to be high and demand is depressed. Raising prices in this situation will further hurt consumer confidence,” said Arvind Saxena, senior vice president of marketing and sales at Hyundai Motor India Ltd.

The local unit of Hyundai Motor Co. is raising prices by about 8,000 rupees to 80,000 rupees, Mr. Saxena said. Mahindra & Mahindra Ltd. said it would raise prices of utility vehicles by between 3,000 rupees and 35,000 rupees. Tata Motors Ltd., TTM -0.31%Maruti Suzuki India Ltd. and the local units of General Motors Co. GM -1.84%and Ford Motor Co. F -3.02%also said they would raise prices but didn’t specify the amount.

A silver lining, however, is the government’s decision not to levy an additional tax on diesel-run vehicles, a tax that was widely feared by the industry. These vehicles have been in demand as the lower cost of diesel and higher efficiency adds to their appeal. The government controls the price of diesel—used by trucks and trains—to keep inflation in check.

“Most diesel-run vehicles have a huge waiting period and the price hike will not impact sales given their advantage,” said Surjit Arora, an analyst with brokerage Prabhudas Liladher Pvt. Ltd.

Finance Minister Mukherjee also raised the excise duty on large cars—with gasoline engines above 1.2 liters or diesel engines above 1.5 liters or with length exceeding four meters—to 24% from 22%. He abolished a flat tax of 15,000 rupees on vehicles that are longer than four meters and have gasoline or diesel engines higher than 1.2 liters or 1.5 liters, respectively, instead levying an excise tax of 27%.

Mr. Mukherjee also raised the customs tax on imported cars and SUVs that cost more than $40,000 and have a gasoline engine of 3,000 cubic centimeters or a diesel engine of 2,500 cubic centimeters, to 75% from 60%.